Opzione Trading India Guida

Beginners Guide to Options What is an option An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset (a stock or index) at a specific price on or before a certain date. An option is a derivative. That is, its value is derived from something else. In the case of a stock option, its value is based on the underlying stock (equity). In the case of an index option, its value is based on the underlying index (equity). An option is a security, just like a stock or bond, and constitutes a binding contract with strictly defined terms and properties. Options vs. Stocks Similarities: Listed Options are securities, just like stocks. Options trade like stocks, with buyers making bids and sellers making offers. Options are actively traded in a listed market, just like stocks. They can be bought and sold just like any other security. Differences: Options are derivatives, unlike stocks (i. e, options derive their value from something else, the underlying security). Options have expiration dates, while stocks do not. There is not a fixed number of options, as there are with stock shares available. Stockowners have a share of the company, with voting and dividend rights. Options convey no such rights. Call Options and Put Options Some people remain puzzled by options. The truth is that most people have been using options for some time, because option-ality is built into everything from mortgages to auto insurance. In the listed options world, however, their existence is much more clear. To begin, there are only two kinds of options: Call Options and Put Options. A Call option is an option to buy a stock at a specific price on or before a certain date. In this way, Call options are like security deposits. If, for example, you wanted to rent a certain property, and left a security deposit for it, the money would be used to insure that you could, in fact, rent that property at the price agreed upon when you returned. If you never returned, you would give up your security deposit, but you would have no other liability. Call options usually increase in value as the value of the underlying instrument increases. When you buy a Call option, the price you pay for it, called the option premium, secures your right to buy that certain stock at a specified price, called the strike price. If you decide not to use the option to buy the stock, and you are not obligated to, your only cost is the option premium. Put options are options to sell a stock at a specific price on or before a certain date. In this way, Put options are like insurance policies. If you buy a new car, and then buy auto insurance on the car, you pay a premium and are, hence, protected if the asset is damaged in an accident. If this happens, you can use your policy to regain the insured value of the car. In this way, the put option gains in value as the value of the underlying instrument decreases. If all goes well and the insurance is not needed, the insurance company keeps your premium in return for taking on the risk. With a Put option, you can quotinsurequot a stock by fixing a selling price. If something happens which causes the stock price to fall, and thus, quotdamagesquot your asset, you can exercise your option and sell it at its quotinsuredquot price level. If the price of your stock goes up, and there is no quotdamage, quot then you do not need to use the insurance, and, once again, your only cost is the premium. This is the primary function of listed options, to allow investors ways to manage risk. Types Of Expiration There are two different types of options with respect to expiration. There is a European style option and an American style option. The European style option cannot be exercised until the expiration date. Once an investor has purchased the option, it must be held until expiration. An American style option can be exercised at any time after it is purchased. Today, most stock options which are traded are American style options. And many index options are American style. However, there are many index options which are European style options. An investor should be aware of this when considering the purchase of an index option. Options Premiums An option Premium is the price of the option. It is the price you pay to purchase the option. For example, an XYZ May 30 Call (thus it is an option to buy Company XYZ stock) may have an option premium of Rs.2. This means that this option costs Rs. 200.00. Why Because most listed options are for 100 shares of stock, and all equity option prices are quoted on a per share basis, so they need to be multiplied times 100. More in-depth pricing concepts will be covered in detail in other section. Strike Price The Strike (or Exercise) Price is the price at which the underlying security (in this case, XYZ) can be bought or sold as specified in the option contract. For example, with the XYZ May 30 Call, the strike price of 30 means the stock can be bought for Rs. 30 per share. Were this the XYZ May 30 Put, it would allow the holder the right to sell the stock at Rs. 30 per share. Expiration Date The Expiration Date is the day on which the option is no longer valid and ceases to exist. The expiration date for all listed stock options in the U. S. is the third Friday of the month (except when it falls on a holiday, in which case it is on Thursday). For example, the XYZ May 30 Call option will expire on the third Friday of May. The strike price also helps to identify whether an option is in-the-money, at-the-money, or out-of-the-money when compared to the price of the underlying security. You will learn about these terms later. Exercising Options People who buy options have a Right, and that is the right to Exercise. For a Call exercise, Call holders may buy stock at the strike price (from the Call seller). For a Put exercise, Put holders may sell stock at the strike price (to the Put seller). Neither Call holders nor Put holders are obligated to buy or sell they simply have the rights to do so, and may choose to Exercise or not to Exercise based upon their own logic. Assignment of Options When an option holder chooses to exercise an option, a process begins to find a writer who is short the same kind of option (i. e. class, strike price and option type). Once found, that writer may be Assigned. This means that when buyers exercise, sellers may be chosen to make good on their obligations. For a Call assignment, Call writers are required to sell stock at the strike price to the Call holder. For a Put assignment, Put writers are required to buy stock at the strike price from the Put holder. Types of options There are two types of options - call and put. A call gives the buyer the right, but not the obligation, to buy the underlying instrument. A put gives the buyer the right, but not the obligation, to sell the underlying instrument. Selling a call means that you have sold the right, but not the obligation, for someone to buy something from you. Selling a put means that you have sold the right, but not the obligation, for someone to sell something to you. Strike price The predetermined price upon which the buyer and the seller of an option have agreed is the strike price, also called the exercise price or the striking price. Each option on a underlying instrument shall have multiple strike prices. In the money: Call option - underlying instrument price is higher than the strike price. Put option - underlying instrument price is lower than the strike price. Out of the money: Call option - underlying instrument price is lower than the strike price. Put option - underlying instrument price is higher than the strike price. At the money: The underlying price is equivalent to the strike price. Expiration day Options have finite lives. The expiration day of the option is the last day that the option owner can exercise the option. American options can be exercised any time before the expiration date at the owners discretion. Thus, the expiration and exercise days can be different. European options can only be exercised on the expiration day. Underlying Instrument A class of options is all the puts and calls on a particular underlying instrument. The something that an option gives a person the right to buy or sell is the underlying instrument. In case of index options, the underlying shall be an index like the Sensitive index (Sensex) or SampP CNX NIFTY or individual stocks. Liquidating an option An option can be liquidated in three ways A closing buy or sell, abandonment and exercising. Buying and selling of options are the most common methods of liquidation. An option gives the right to buy or sell a underlying instrument at a set price. Call option owners can exercise their right to buy the underlying instrument. The put option holders can exercise their right to sell the underlying instrument. Only options holders can exercise the option. In general, exercising an option is considered the equivalent of buying or selling the underlying instrument for a consideration. Options that are in-the-money are almost certain to be exercised at expiration. The only exceptions are those options that are less in-the-money than the transactions costs to exercise them at expiration. Most option exercise occur within a few days of expiration because the time premium has dropped to a negligible or non-existent level. An option can be abandoned if the premium left is less than the transaction costs of liquidating the same. Option Pricing Options prices are set by the negotiations between buyers and sellers. Prices of options are influenced mainly by the expectations of future prices of the buyers and sellers and the relationship of the options price with the price of the instrument. An option price or premium has two components. intrinsic value and time or extrinsic value. The intrinsic value of an option is a function of its price and the strike price. The intrinsic value equals the in-the-money amount of the option. The time value of an option is the amount that the premium exceeds the intrinsic value. Time value Option premium - intrinsic value. Beginners Guide to Option Trading and Investing in Call and Put Options Use of this website andor products amp services offered by us indicates your acceptance of our disclaimer. Disclaimer: Futures, option amp stock trading is a high risk activity. Any action you choose to take in the markets is totally your own responsibility. TradersEdgeIndia will not be liable for any, direct or indirect, consequential or incidental damages or loss arising out of the use of this information. This information is neither an offer to sell nor solicitation to buy any of the securities mentioned herein. The writers may or may not be trading in the securities mentioned. All names or products mentioned are trademarks or registered trademarks of their respective owners. Copyright TradersEdgeIndia All rights reserved. Futures Trading - The Perfect Business Futures trading is a business that gives you everything youve ever wanted from a business of your own. Roberts (1991) calls it the worlds perfect business. It offers the potential for unlimited earnings and real wealth, and you can run it working your own hours while continuing to do whatever youre doing now. You operate this business entirely on your own, and can start with very little capital. You wont have any employees, so you wouldnt need attorneys, accountants, or bookkeepers. In fact, although youd be buying and selling the very necessities of life, you never even carry an inventory. Whats more, youd never have collection problems because you wont have any quotcustomers, quot and since there is no competition, you wont have to pay the high cost of advertising. You also wont need office space, warehousing, or a distribution system. All you need is a personal computer and you can conduct business from anywhere in the world. Interested. Please go ahead and read on What is a Futures Contract A futures contract is a standardized, transferable, exchange-traded contract that requires delivery of a commodity, bond, currency, or stock index, at a specified price, on a specified future date. Generally, the delivery does not occur instead, before the contract expires, the holder usually quotsquares their positionquot by paying or receiving the difference between the current market price of the underlying asset and the price stipulated in the contract. Unlike options, futures contracts convey an obligation to buy. The risk to the holder is unlimited. Because the payoff pattern is symmetrical, the risk to the seller is unlimited as well. Dollars lost and gained by each party on a futures contract are equal and opposite. In other words, futures trading is a zero-sum proposition. Futures contracts are forward contracts, meaning they represent a pledge to make a certain transaction at a future date. The exchange of assets occurs on the date specified in the contract. Futures are distinguished from generic forward contracts in that they contain standardized terms, trade on a formal exchange, are regulated by overseeing agencies, and are guaranteed by clearinghouses. Also, in order to insure that payment will occur, futures have a margin requirement that must be settled daily. Finally, by making an offsetting trade, taking delivery of goods, or arranging for an exchange of goods, futures contracts can be closed. Trading in futures is regulated by the Securities amp Exchange Board of India (SEBI). SEBI exists to guard against traders controlling the market in an illegal or unethical manner, and to prevent fraud in the futures market. Futures contracts are purchased when the investor expects the price of the underlying security to rise. This is known as going long. Because he has purchased the obligation to buy goods at the current price, the holder will profit if the price goes up, allowing him to sell his futures contract for a profit or take delivery of the goods on the future date at the lower price. The opposite of going long is going short. In this case, the holder acquires the obligation to sell the underlying commodity at the current price. He will profit if the price declines before the future date. Hedgers trade futures for the purpose of keeping price risk in check. Because the price for a future transaction can be set in the present, the fluctuations in the interim can be avoided. If the price goes up, the holder will be buying at a discount. If the price goes down, he will miss out on the new lower price. Hedging with futures can even be used to protect against unfavorable interest rate adjustments. While hedgers attempt to avoid risk, speculators seek it out in the hope of turning a profit when prices fluctuate. Speculators trade purely for the purpose of making a profit and never intend to take delivery on goods. Like options, futures contracts can also be used to create spreads that profit from price fluctuations. Accounts used to trade futures must be settled with respect to the margin on a daily basis. Gains and losses are tallied on the day that they occur. Margin accounts that fall below a certain level must be credited with additional funds. Settling Futures Contracts Futures contracts are usually not settled with physical delivery. The purchase or sale of an offsetting position can be used to settle an existing position, allowing the speculator or hedger to realize profits or losses from the original contract. At this point the margin balance is returned to the holder along with any additional gains, or the margin balance plus profit as a credit toward the holders loss. Cash settlement is used for contracts like stock index futures that obviously cannot result in delivery. The purpose of the delivery option is to insure that the futures price and the cash price of good converge at the expiration date. If this were not true, the good would be available at two different prices at the same time. Traders could then make a risk-free profit by purchasing goods in the market with the lower price and selling in the market with the higher price. That strategy is called arbitrage. It allows some traders to profit from very small differences in price at the time of expiration. Futures prices are presented in the same format as cash market prices. When these prices change, they must change by at least a certain minimum amount, called the tick. The tick is set by the exchange. Prices are also subject to a maximum daily change. These limits are also determined by the exchange. Once a limit is reached, no trading is allowed on the other side of that limit for the duration of the session. Both lower and upper limits are in effect. Limits were instituted to guard against particularly drastic fluctuations in the market. In addition to these limits, there is also a maximum number of contracts for a given commodity per person. This limit serves to prevent one investor from gaining such great influence over the price that he can begin to control it. How Futures came into being - The History of the Markets Along time ago, back in the days of Caesar, farmers and herdsmen needed a place to go to trade their commodities. Commodities, according to Websters Dictionary, is any useful thing that is bought and sold as an article of commerce. So, the farmers set up a marketplace in which to trade the quotcommoditiesquot. That was all well and good except for the problem of timing. Unfortunately, corn and other grains only are harvested at certain times of the year while the need for these grains was consistent year-round. The traders began making what is now called a forward contract. A forward contract in the commodities market is a contract made by two people setup for the purchase and sale of a certain amount of a certain commodity for delivery at a certain time. It is considered a forward contract because delivery of the good occurs in the future. These forward contracts allowed farmers and herdsmen to guarantee a buyer for their grains and herds at a certain price and in the time frame that they needed. This went well for a while but, as time went on, they incurred some problems. For example, lets say Antonious was a farmer of wheat back in the Caesarian times. And, he agreed to sell 5,000 bushels of wheat to Platius. Delivery was set for September. All is going great until a flash flood wiped out Antonius entire crop. September comes around and Platius approaches Antonius to collect his new wheat. Well, the price of wheat now has doubled and Antonius doesnt have any wheat. Oh, did I also tell you that Antonius skipped town. This poses a huge problem for Platius since he must now find someone else who has wheat, but also, he must pay double for it. Fortunately, this welching problem was corrected by the formation of quotGuildsquot. The guilds were formed by the very traders using the markets. The guilds hold the entire group of users personally responsible. This allowed for confidence and insurance that the contracts made in the market would be backed by the full faith of the markets. Upon the fall of the Roman Empire, the commodity markets followed in the same way. The quotDark Agesquot brought a type of market, which had no centralized meeting place. A sort of nomadic group would travel around from village to village and buy or sell their supplies to those who needed them. Many times, traders would trick others upon the purchase of a pig. The buyer would choose the pig he or she wanted and the seller would reach under the table to grab a bag. Well, at the same time they were grabbing a bag, they would drop the pig and place a cat into the bag. What a surprise it must have been for the buyer to get home only to find out they would be the proud owner a cheap, useless cat instead of a pig. That is where the term, quotLet the cat out-of-the-bagquot comes from. After the dark ages, there wasnt a great deal of information recorded on the markets until the mid-1800s. The first futures contract (which is much like that of a forward contract) in our modern markets as we know of them today was for 2,000 bushels of corn traded in 1852. It was traded in a mid-sized town back then on the coast of Lake Michigan. Yes, that mid-sized town was Chicago, Illinois. A few years later, the Chicago Board of Trade was founded. Things havent changed much since then. Except for the chalk boards where the prices were written upon are now digital and the telegraph has been upgraded to the telephone, everything else is pretty much the same. Today, there are many boards of trade, Chicago, Kansas City, Minneapolis, Montreal, QB New York City, London, Hong Kong and many other cities around the world. You may wonder why do we need the markets other than to have a place for producers and consumers of these commodities to trade. Well, the producers and consumers set up these markets to relieve themselves of the risk of losing excessive amounts of money from price fluctuation. You may ask where does the risk go Well, the answer is the speculator. A speculator is an individual or a group of individuals that trade in the markets purely for the opportunity to make money. They are the traders that carry the risk in order to attempt to profit off it. Futures Trading - The Perfect Business Futures trading is a business that gives you everything youve ever wanted from a business of your own. Roberts (1991) calls it the worlds perfect business. It offers the potential for unlimited earnings and real wealth, and you can run it working your own hours while continuing to do whatever youre doing now. You operate this business entirely on your own, and can start with very little capital. You wont have any employees, so you wouldnt need attorneys, accountants, or bookkeepers. In fact, although youd be buying and selling the very necessities of life, you never even carry an inventory. Whats more, youd never have collection problems because you wont have any quotcustomers, quot and since there is no competition, you wont have to pay the high cost of advertising. You also wont need office space, warehousing, or a distribution system. All you need is a personal computer and you can conduct business from anywhere in the world. Your business deals with the basic staples of everyday life: lumber, fuel, grains, meats, orange juice, sugar, cocoa, coffee, metals, currencies, and so on. Individuals, small businesses, and giant corporations use these items every day of the year, so there always is, and always will be, a need for them. The commodities business doesnt suffer from hard times because it can flourish under any economic conditions. In fact, commodity exchanges have been thriving for centuries. Their purpose is to provide a means for the orderly transfer of commodities between buyers and sellers. Farmers, dealers, and manufacturers use the world-wide network of commodity exchanges to reduce the risks of future price fluctuations. Thats why only part of the exchange floor is devoted to cash sales of commodities for immediate delivery, and over 90 of an exchanges business is in futures contracts. How do you fit in In your futures business, you buy or sell futures contracts because you expect to make a profit on the transaction. In fact, most futures amp commodities traders have no use for the actual commodities they are trading they never even see them. They are just people like you and me people with a certain amount of capital to invest getting started in their own business. There are millions of them and they come from almost every profession: from clerks to executives, from janitors to doctors, from students to university presidents. It is the millions of traders controlling the millions and millions of contracts that allow the exchanges to exist. But more than that, we make it possible for farmers, dealers, and manufacturers to reduce their own risks. For performing this service, we expect to make a profit. The great thing about all of this is that you dont need a college degree or even a high school education to do well trading futures. However, you do need some training, you need an objective system, and you need a plan. Use of this website andor products amp services offered by us indicates your acceptance of our disclaimer. Disclaimer: Futures, option amp stock trading is a high risk activity. Any action you choose to take in the markets is totally your own responsibility. TradersEdgeIndia will not be liable for any, direct or indirect, consequential or incidental damages or loss arising out of the use of this information. This information is neither an offer to sell nor solicitation to buy any of the securities mentioned herein. The writers may or may not be trading in the securities mentioned. All names or products mentioned are trademarks or registered trademarks of their respective owners. Copyright TradersEdgeIndia All rights reserved. The Options Futures Guide Learn option trading and you can profit from any market condition. Understand how to trade the options market using the wide range of option strategies . Discover new trading opportunities and the various ways of diversifying your investment portfolio with commodity and financial futures. To help you along in your path towards understanding the complex world of financial derivatives. we offer a comprehensive futures and options trading education resource that includes detailed tutorials, tips and advice right here at The Options Guide . Options Strategy Search Engine Profit graphs are visual representations of the possible outcomes of options strategies. Profit or loss are graphed on the vertical axis while the underlying stock price on expiration date is graphed on the horizontal axis. Option Basics: What are Stock Options Before you begin trading options, you should know what exactly is a stock option and understand the two basic types of option contracts - puts and calls. Learn how they work and how to trade them for profits. Read more. Binary Option Basics: What are Binary Options and How to Trade Them Binary option trading is quickly gaining popularity since their introduction in 2008. Check out our complete guide to trading binary options. Read more. Beginner Strategy: Covered Calls The covered call is a popular option trading strategy that enables a stockholder to earn additional income by selling calls against a holding of his stock. Read more. Stock Option Advice: Buying Straddles into Earnings Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. Read more. Stock Option Trading Basics: Why Invest with Options For the short to medium term investor, stock option investing provide an additional suite of investment options to let him make better use of his investment capital. Read more. Advanced Concepts: Understanding Option Greeks When trading options, you will come across the use of certain greek alphabets such as delta or gamma when describing risks associated with various options positions. They are known as the greeks. Read more. Option Trading Advice: How a Low Commission Broker Can Increase Option Spreads Profits by 50 or more Many options traders tend to overlook the effects of commission charges on their overall profit or loss. Its easy to forget about the lowly 15 commission fee when every profitable trade nets you 500 or more. Heck, its only 3 right. Read more. Stock Options Advice: Effect of Dividends on Option Pricing Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. Read more. Advanced Concepts: Put Call Ratio - What It Is and How to Use It Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. Read more. Advanced Concepts: Futures Options Trading Another way to play the futures market is via options on futures. Using options to trade futures offer additional leverage and open up more trading opportunities for the seasoned trader. Read more. Stock Option Advice: Day Trading using Options Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. Read more. Stock Options Tutorial: Writing Puts to Purchase Stocks If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. Read more. Stock Options Advice: Leverage using Calls, Not Margin Calls To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. Read more. Stock Option Tutorial: Dividend Capture using Covered Calls Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. Read more. Ready to Start Trading Your new trading account is immediately funded with 5,000 of virtual money which you can use to test out your trading strategies using OptionHouses virtual trading platform without risking hard-earned money. Once you start trading for real, all trades done in the first 60 days will be commission-free up to 1000 This is a limited time offer. Act nowQuestion . I am interested in trading in Stock and Nifty Options. Can you please guide on how to be profitable in Options Trading. Answer . Options are a major trend in Indian Stock markets now, with turnover in Options category being significantly higher than that of Stocks, Index or Derivatives category. Just to take an example, on 22-Feb-13, turnover for Index Futures at NSE was 7,220 crores, turnover for Stock Futures was 16,574 crores and turnover for Index Options was a whooping 87,077 crores. So options have become an instrument of choice for Traders 8211 both Retail and Institutional traders 8211 in Indian Stock Markets. As our Finance Minister remarked recently, Indian markets are primarily non-delivery based, meaning majority of trades do not result in deliveries and are cash settled. Options in Indian market are cash settled as well with no delivery taking place at the option expiry date. Simply speaking, an option is a bet on direction of either the underlying Index e. g. Nifty or a given Stock. When a trader is taking a position in Options, he is either buying or selling an options contract, and is making a bet that either the underlying instrument will rise in price or fall in price before the monthly expiry date. Obviously, if the direction is predicted accurately, the trader stands to hold a profitable position, which he can close at or before the expiry date. Options are basically of two types 8211 Call Option and Put Option. A buyer for a Call option is taking a position that underlying instrument e. g. the Stock or Nifty Index, would rise in value before expiry date. A buyer of Put options is taking the opposite position that the underlying instrument e. g. the Stock or Nifty Index, would actually fall in value before expiry date. However, there are few more things to keep in mind, before you jump in Options trading. One should be aware of the strike price and days remaining before expiry as well. Options decay in value as their price is dependent on variable known as Theta, which is also known as the rate of decay. Simply speaking, if you are an options buyer, your options will lose a little bit of value each day, even if the underlying instrument is not moving at all, due to time decay. Due to this reason, professional traders or large institutions are biased towards options selling, rather than options buying, as they can benefit from this time decay if underlying instrument is not moving at all. However, option selling is akin to selling insurance and hence is detrimental to an individual retail trader as the potential liability can be significant if volatility increases overnight. Another way to benefit from options is to take a combination trade in Options. A trader expecting the Stock or Index price to change dramatically in next few days can buy an Options Straddle. A long straddle involves purchasing both a call option and a put option on same stock or Index at the same strike price and expire date. For example, if Infosys is coming up with its quarterly results and investors are not sure whether it will be a positive result or not, one can buy a Call option and Put Option at same strike price, preferably closer to current stock price. If results are good, Call options would rise in price and would make up a profitable trade, else if results are less than expected Put Options would result in profits for the trader. Another simple way to trade in options for a trader already holding a stock is to execute a Covered Call. This strategy has to be adopted in bearish markets for stocks which are not expected to rise in price. If a trader is holding a stock in cash segment, he can sell the corresponding Call options for the stock. When the stock declines in price as expected, the call options would be worthless and seller of Call options would get to keep the option premium which he received while selling the Call Options. If the stock goes up, since the trader is already holding the stock in cash market, he would get compensated with the price rise of his holdings. This is a useful strategy for slightly bearish markets. This is a simple primer, however Options trading is a complicated subject and one needs to do significant research before jumping in Options trading. With the high Options volumes witnessed in Indian markets, Options trading is much more coveted than cash trading or Futures trading and here to stay for long.